Saturday, June 16, 2007

Being Rich, Old American In 2010 Could Be Risky

As I pointed out in my analysis of the Democrat's management of the Iraq war, President Bush can only veto active decisions from Congress. He cannot, however, veto passive decisions from Congress made by simply not passing any legislation. This is not only relevant with regards to the issue of Iraq but also with regards to taxation.

In order for the tax cuts bills to pass, Bush and his Congressional allies felt it necessary to formally limit them in time, so that they would all expire in 2010. That way, the "cost" of the tax cut would appear smaller and so this helped win over centrist Senators and Congressmen. The only problem is that while 2011 seemed very far away in 2001-2003, it is not so far away any longer. This means that unless an active decision to extend them or make them permanent is made, they will automatically expire, which in effect would amount to a tax increase.

This is why the Democrats are content with doing nothing in terms of tax legislation. They know that an active decision to repeal the tax cuts would be met with a veto from Bush. But since the tax cuts are set to expire according to present law, that won't be necessary. All they need to do is not pass any legislation to extend the tax cuts. And since that is a passive decision, Bush can't veto it. And so, if Democrats hold on to Congress after the 2008 elections, then the tax cuts will likely expire. This is to say, taxes will be raised in 2011 if Congress remains Democratic. Even if a Republican candidate becomes president, he can't extend the tax cuts for the same reason Bush can't.

That means for example income taxes, capital gains taxes and particularly taxation of dividens will be sharply increased in 2011. But most perverse will be the effect on inheritance taxation, which just earn its nickname "the Death tax" even more than ever in 2010.

According to present law, the inheritance tax is gradually declining and is set to fall to zero in 2010. But in 2011, the tax is set to return to its high pre-2001 level. As this means that wealth inherited in 2010 will be much more worth than wealth inherited in 2011, this means that some rather perverse incentives for heirs will be created. As Mallory Factor puts it in National Review: "If you’re an older American, you may not want to drink that champagne cocktail your children give you on New Year’s Eve 2010."


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